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Sequential Investment And Time To Build

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  • Gunther Friedl
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    Abstract

    Real world investment decisions are generally made sequentially, over time. Management must consider the possibility of subsequent decisions like suspending a project when an initial investment decision is made. This consideration seems to be particularly important in the case of investments, which take a long time to build. In this paper, I analyze the impact of lags between the initial investment decision and the completion of the project. I also analyze in a dynamic setting under uncertainty the impact on the investment value of the option to suspend investment or operations and the investment threshold. I show that the standard net present value rule works well within my framework. This result contrasts with the main results in most of the real options literature. I use my model to value the length of permit procedures for locational decisions.

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    Bibliographic Info

    Article provided by LMU Munich School of Management in its journal Schmalenbach Business Review.

    Volume (Year): 54 (2002)
    Issue (Month): 1 (January)
    Pages: 56-79

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    Handle: RePEc:sbr:abstra:v:54:y:2002:i:1:p:56-79

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    Cited by:
    1. Barbara Harreiter & Thomas Pfeiffer & Georg Schneider, 2007. "Are real options more valuable in the presence of agency conflicts?," Review of Managerial Science, Springer, vol. 1(3), pages 185-207, November.
    2. Gilroy, Bernard Michael & Lukas, Elmar, 2005. "The Choice between Greenfield Investment and Cross-border Acquisition: A Real Option Approach," MPRA Paper 18819, University Library of Munich, Germany.

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